Ratings downgrade reflects payment default by ISTC

Ratings agency DBRS has downgraded the €3 billion debt issued by International Securities Trading Corporation (ISTC) to a level that indicates the insolvent specialist lender has defaulted on its interest payments.

DBRS moved yesterday to lower its rating on ISTC's senior unsecured long-term debt to D from CCC and reduced the rating on its subordinated debt to D from C.

Securities rated C or CCC by DBRS are deemed to be in danger of default of interest and principal.

The D rating implies that the issuer has either not met a scheduled payment or has made it clear that it will be missing such a payment in the near future.

Backed by some of the wealthiest and most prominent Irish business figures, ISTC is the largest local casualty of the credit crunch on the international financial markets. Its creditors include ABN Amro, Bank of America, Credit Suisse, Merrill Lynch, Morgan Stanley and Royal Bank of Scotland.

While ISTC went into examinership on November 30th, DBRS says it may not assign a D rating under a bankruptcy announcement as allowances for grace periods may exist in the underlying legal documentation.

"As you know, we announced back in November that we weren't going to pay our interest payments and we were in default . . . What's coming out today isn't significant news," said ISTC founder Tiernan O'Mahoney. He declined last night to comment on efforts to rescue the company. "It would be irresponsible of me to comment on it and it would be unhelpful and prejudicial."

A former Anglo Irish Bank executive, Mr O'Mahoney established ISTC in 2005 to lend capital to banks. Its backers include Fermanagh entrepreneur Seán Quinn, Anglo Irish Bank chairman Seán FitzPatrick, telecoms billionaire Denis O'Brien, developer Paddy Kelly and a large number of other investors.

ISTC's examiner, Dublin accountant John McStay, is assessing whether the firm's bank lenders have sold collateral held against loans provided to the company. It is believed he is trying to assess the full scale of ISTC's losses before approaching potential investors for more capital to fund its rescue.

If one of ISTC's bank creditors makes a loss on the sale of any collateral held against loans provided to the company, then the loss is transferred to the firm and becomes a debt on its books.

ISTC postponed publication of its results in November, suspended trading of its shares in an unofficial grey market and scrapped a €150 million fundraising after writing down its investments by at least €70 million. The development followed a downgrading of its assets.

It is believed a number of institutions have expressed an interest in making an investment in ISTC in the belief its business model may be fundamentally sound, in spite of the credit crunch. These include investment bank Goldman Sachs and hedge funds Silverpoint and Avenue Capital.